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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Executive Incentives and Risk-Taking in Switzerland |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 62 |
| Date | 2015 |
| Abstract Text | The general research question of this thesis is whether equity grants provide CEO risk-taking incentives, and if yes, how exactly they a ect rm policies and rm risk. I focus my study on the largest 100 listed Swiss companies, analysing the period from 2007 to 2013. In the context of the ongoing debate about manager compensation, the topic of equity grants to manage exec- utive incentives is highly relevant, especially since the outburst of the nancial crisis. However, while there exists a large body of literature investigating the association between managerial compensation and risk-taking for US companies, empirical evidence for Switzerland is missing so far. In order to examine the relationship between executive compensation and rm policies, researchers use various measures of executive motives. Most recently, many studies focus on how managers bene t from an increase in stock price (delta) when considering any corresponding changes in rm risk (vega). The common belief is that vega implements riskier investment and nancing decisions while results on delta are ambiguous. A high sensitivity to stock price induces a manager to work harder because he pro ts from an increase in stock price, but also enhances the CEO's exposure to rm risk, potentially making him more risk averse. However, there is a recent debate about the appropriateness of vega and delta to measure executive motives, since these metrics are derived from the Black and Scholes (1973) model. Bettis, Bizjak, and Lemmon (2005) argue that the value of employee stock options for a CEO is lower than the value of freely tradable market options, mainly referable to their non-transferability and shorter expected maturity. Alternative ways to evaluate incentives provided by equity grants used in prior studies include CEO ownership, the number of shares and options held by the CEO, or the delta of the intrinsic value of equity instruments. As indications of the extent of risk inherent in the rm's policies, prior studies use risk measures, such as R&D expenditures, CAPEX, leverage, rm focus, or accruals. Thereby high investments in R&D, high leverage, and a high extent of misreporting are regarded as aggressive and risky policies, whereas high CAPEX is seen as low-risk investment. In general, results of prior studies indicate a positive relation between vega and risk-taking, whereas ndings on the association between delta and risk-taking are ambiguous. |
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